Reset on home loan and other floating rate loans to be made more transparent. This measure would not make interest rates beneficial for you, but you would have more rights as a customer.

Once every two months, the Monetary Policy Committee (MPC) of the Reserve Bank of India meets to review interest rates and other aspects of monetary policy. Prior to today’s meeting, the expectation was that interest rates would be left unchanged. That apart, there was an expectation that the inflation projection for the year would be revised upward. This is due to the significant negative surprise on food prices, in particular vegetable prices.

The policy review was on expected lines. The six-member committee took a unanimous decision to maintain the repo rate at 6.5 percent. This is the rate that signals interest-rate movements across the economy.

Have we already seen the last rate hike? Probably, yes The RBI maintained the stance of “withdrawal of accommodation” i.e., interest rates may be hiked if required. However, for all practical purposes, we may have seen the last rate hike of the current rate cycle on February 8. The reason the RBI’s MPC is maintaining the approach is that its target for CPI inflation is 4 percent. The leeway of 2 percent gives an upper tolerance level of 6 percent. The CPI projection being relatively higher than 4 percent, the panel is expected to maintain that stance.

Inflation outlook

The inflation projection was revised upward. CPI for the year 2023-24 was projected at 5.1 percent in the previous review meeting on June 8. Today, it was revised upward by 30 basis points to 5.4 percent. In particular, for the current quarter, i.e., July-September 2023, the CPI projection was increased by one percentage point, from 5.2 to 6.2 percent. Vegetable and fruit price inflation is seasonal, impacting this quarter more than other periods.

The Cash Reserve Ratio (CRR) as such remains at 4.5 percent. To manage the increased liquidity in the banking system, on the quantum between May 19 and July 28 (the Rs 2,000 note withdrawal effect), there will be an incremental CRR of 10 percent. This is a temporary measure and will be reviewed on September 8 or earlier.

Among other measures, the RBI announced more transparency in the reset of floating rate loans. The statement includes “… revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers…it is proposed to put in place a proper conduct framework to be implemented by all REs to address the issues faced by the borrowers…lenders should clearly communicate with the borrowers for resetting the tenor and/or EMI, provide options of switching to fixed rate loans or foreclosure of loans”.

Impact on equity and debt markets

For the markets, both equity and debt, this policy is on expected lines. Rates have been maintained and the stance has been maintained. Inflation looks higher now, but that was known; we are all witnessing elevated vegetable and fruit prices. Inflation data for July 2023, to be announced over the next few days, will be much higher than the 4.8 percent of June 2023. The RBI decided to look through this for interest rate policy formulation. For your investment portfolio, this was just one “station” that you crossed on your journey.

The one positive aspect for you would be on home loan and other floating rate loans. Many times, when interest rates move up, a bank elongates the tenure of the loan while keeping the EMI same. The bank should explain the options to the customer, e.g., increase in EMI / increase in tenure / combination of the two / pre-payment / conversion to fixed rate loan. In any loan term reset, communication to and consent from the customer is important, as against a unilateral decision by the Bank. This measure would not make interest rates beneficial for you, but you would have more rights as a customer.

Some time next year, depending on the inflation trajectory, we may look forward to easing of interest rates. But it is early to comment now as there are multiple variables.

Sources : https://www.moneycontrol.com/news/business/personal-finance/rbi-holds-interest-rates-who-wins-who-loses-11146281.html